Page 2 Defining Markets & Market Segments
Levels of Market Segments |
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Page 2 Defining Markets & Market Segments
Levels of Market Segments |
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Exhibit 1 |
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As the diagram in Exhibit 1 indicates, multiple levels of market segments can exist. The process of market segmentation begins by defining the overall mass market or 'total product-market.' Examples of mass markets are the overall toothpaste and the snack food markets from our previous examples. Again, these mass markets are generally much too diverse to effectively target with a single marketing program. This means that we must segment them into smaller sub-markets. Our goal is to find groups of customers within the mass market that are more homogeneous in terms of their needs and purchasing-related characteristics by subdividing the mass market into a series of market segments.
Sometimes it is possible that a firm may choose not to recognize the existence of market segments within the overall product-market, or segments just may not exist that offer enough potential to justify the creation of dedicated, specialized marketing programs. In such cases, firms may decide to construct a single marketing strategy that targets the entire mass market. Essentially, this means that firms are choosing to engage in mass production, mass distribution, and mass promotion of one product to all buyers in a particular market. As a result, of course, the firm is essentially targeting the average buyer in this market with a single marketing mix. This strategy is also known as a market-aggregation or undifferentiated-market strategy.
This strategy certainly complements the production concept as we defined it earlier in the course. Recall that the production concept assumes that a quality product that is priced right will sell itself. The firm's major focus becomes one of reducing unit costs while still maintaining product quality. Mass production and mass distribution generate the scale economies and other production and marketing efficiencies that lead to lower costs and, therefore, lower prices for customers. This was Henry Ford's strategy with the Model T -- "You can have any color as long as it is black."
Other firms also have employed this strategy -- Ford was not alone! For example, Coca-Cola at one time sold only one product in one size in virtually all market areas. There was no attempt to segment the mass market. Coke simply did not have the competition that it faces today. However, the story is now much different. Coca-Cola has a wide range of products in multiple sizes and packages designed to meet the specific needs of unique market segments within the overall soft drink market.
A good question to address at this point is when can mass marketing work? We have examined one situation where it makes sense -- early in a product’s life cycle. This was the case with Ford's Model T. When automobiles were first introduced, it made sense to focus on the mass market. Most people who purchased cars in these early years were primarily filling basic transportation needs. However, as the market expanded, consumers' wants and needs expanded. Cars were more than just an alternative means of transportation -- they became status symbols. These additional motives for buying cars effectively fragmented the mass market, leading to the emergence of multiple market segments that required entirely different marketing strategies.
Mass marketing also is appropriate when the product category simply does not easily lend itself to brand differentiation. For example, most agricultural products are basically the same regardless of their source. Fresh vegetables, fruits, grains and the like are of comparable quality from nearly all suppliers. More importantly, few differences in consumer needs exist for these products. Similarly, products such as hacksaw blades, brass polish, toothpicks, rubber bands, and pencil leads are virtual commodities in the eyes of most buyers. The mass-marketing of these products is equally appropriate.
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Exhibit 2 |
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Let’s summarize some of the pros and cons of mass-marketing (Exhibit 2).
 | Treating the overall market as one large market creates a large pool of potential customers. In other words, a large 'market potential' may exist. |
| In turn, this large market potential can yield tremendous scale economies in production, distribution, and promotion that, in turn, can yield cost reductions and lower prices for customers. Few variations on the basic product are produced, resulting in longer, more efficient production runs. Warehousing and transportation costs are minimized because systems are geared to distributing a single product. Finally, promotion costs are reduced because only a single, often simple message needs to be communicated to a single target audience. |
| Even though the market may be approached as a single entity, firms still can differentiate their brands from those of competitors with some degree of success. Generally done via promotion, firms strive to make their brands appear different from and superior to competitors' brands. If successful, such product differentiation can create brand preferences and help reduce the degree to which consumers use price as the major criterion for choosing between brands. For example, Frank Purdue (Purdue Chickens) successfully differentiated his brand of packaged chicken (a super market commodity) by focusing on the correlation between skin color (yellow) and freshness in his advertising. |
| The greatest drawback to mass marketing is that it may simply be inappropriate to treat the market as one homogenous whole. Customer wants and needs may be too diverse to employ the 'one size fits all' or 'you can have any color as long as it is black' strategy. In reality, even markets for most commodities can be segmented. For example, gasoline is a virtual commodity, but the market has been successfully segmented in that different grades of fuel (regular, premium, etc.) with a variety of additives (ethanol, cleaning agents) are targeted to different driving needs. |
| Firms engaging in mass-marketing are more susceptible to price competition. To the degree that consumers perceive all brands in the product category as roughly equivalent, price may be the key criterion driving the purchase decision |
Market segments consist of individuals who have similar, but not identical, needs. Consumers within a given market segment also will possess similar purchase-related characteristics (demographic and psychographic traits), but not identical characteristics. Examples from Haley's toothpaste study are the sensory, sociable, and worrier segments. From the paint study, relevant market segments are the crafty-craftsman, helpless homemaker, and cost-conscious couple segments.
Think of market segments as large identifiable subgroups that are split out from the mass market. Each of these segments is internally more 'homogeneous' than is the mass market. The term 'homogeneous' means that, within each segment, consumers are similar to one another in terms of their wants, needs and purchasing-related characteristics. These purchasing-related characteristics include demographic profiles, personality traits, lifestyle characteristics, social class membership, and a wide range of attitudinal traits.
I should emphasize that, even though consumers within a given segment are similar to one another, they are not identical on all of the above dimensions. There is still some degree of dissimilarity between consumers within each segment. It probably is better to say that consumers within segments tend to have overlapping wants, needs, and purchasing-related characteristics. Consumers' wants and needs will overlap, but will not be identical. Similarly, their demographics, personalities, life styles, and other traits will be similar, but will not be identical. The marketer’s task is to find the key dimensions on which consumers overlap and then create marketing programs that target these similarities.
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Exhibit 3 |
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The fitness market provides an excellent example of the relationships between mass markets and levels of market segments. The relevant mass-market is the total fitness product-market. Within this market, there are a variety of market segments associated with the different ways that consumers can pursue fitness-related needs. Consumers can stay fit by working-out in health clubs, they can work-out at home, or they can engage in recreational sports. The fitness product-market, therefore, can be segmented into three basic segments, as shown in Exhibit 3:
| The health club segment, |
| The in-home fitness segment, and |
| The recreational fitness segment. |
Each of these segments is internally more homogeneous with respect to consumer needs and purchase-related characteristics. Health clubs fill a distinct set of fitness needs that attract certain types of customers. The in-home fitness segment fills the needs of a different type of consumer. These customers have needs that overlap with those of people who frequent health-clubs, but differences also exist. The latter customers often are more concerned about privacy, cost, and convenience. Consumers in the recreational fitness market are often most interested in the recreational activity itself. Recreational sports, such as tennis, racquet-ball, baseball, basketball, skiing, etc. fall into this category. Fitness need may be secondary to the desire to participate in the recreational activity.
Just as market segments are derived from larger product-markets, these segments, in turn, can be further segmented. The resulting market segments are called 'niches' because each contains consumers that are significantly more similar to one another with respect to customer needs and purchasing-related characteristics than were their parent segments.
Because niches tend to be very narrowly defined, they also tend to be smaller than the market segments from which they were created. Moreover, because they tend to be smaller, they also tend to attract less competition. This can be very desirable. By focusing the firm's limited marketing resources on satisfying the specific needs of narrowly defined market segments (niches), a differential advantage can be obtained that cannot easily be matched by competitors.
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Exhibit 4 |
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Let’s expand our fitness market example to see how the health club market segment can be further sub-divided into additional segments, some of which may qualify as niches. The example reflects the health club market in the Dallas-Fort Worth-Denton metropolitan area in North Texas. A viable segmentation scheme for this market is depicted in Exhibit 4. The health club segment can be divided into clubs that are orientated primarily towards: (1) body building; (2) family fitness; and, (3) young, single adults (primarily college students). A prestige club segment also exists, although the importance of this segment has been substantially reduced over the last few years. Price competition and market saturation have forced clubs in this segment to compete more directly with clubs in other categories. The body building segment provides a good example of a niche. Dedicated body building clubs exist that amount to 'sweat shops' serving the needs of amateur and professional body builders. These clubs focus on traditional free weights, with limited machines, support facilities and services. These clubs are in marked contrast to clubs such as World Gym, Gold's Gym, Q-Club, and Presidents which cater to the general fitness and social needs of families and young singles.
Examples of niches are found in many product
categories. Ferrari
is always a good example. This company produces a very unique, expensive product that is
targeted to consumers with high discretionary buying power -- these consumers comprise a very select market
niche.
In
financial markets, Green Tree Financial Cooperation
specializes in financing the purchase of mobile homes. The company has done a very good
job of building a marketing program to specifically target this niche (Green
Tree was recently acquired by Conseco Financial). Customers in
this niche are generally lower income buyers with rather unstable job
histories. As a result, there are only a handful of companies that are
willing to accept the risks associated with financing mobile homes. Because of these
inherent risks, Green Tree charges a higher interest rate than is paid by someone
buying a regular home. Green Tree recently has expanded into other high risk insurance
market niches including small aircraft, boats, RVs, motorcycles, pianos and organs,
horse trailers, snowmobiles, and four-wheel all terrain vehicles.
Progressive Corporation is an auto insurance firm that, like Green Tree, targets a market niche consisting of high-risk customers. They specialize in providing insurance for drivers who find it tough to get insurance from traditional sources. As you would expect, they charge a premium for their policies.
At the bottom of our diagram (Exhibit 1) is the individual market. Individuals constitute the ultimate in market segmentation in that every individual in a market may be treated as a unique market segment. This practice is most common in industrial markets where individual firms may constitute market segments. This makes sense for some types of industrial products. For example, when selling major installations, such as customized manufacturing equipment that will become part of a production assembly line, the equipment often must be custom designed. Individual customers may possess unique production requirements that differ substantially from the requirements of other customers for the same product. As a result, the seller may have to design an entire marketing program around each industrial customer that it serves. In essence, the seller is treating each buying organization as an individual market segment.
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Page last modified: January 22, 2002
